MFS Invented the Mutual Fund. How Its CEO Is Keeping Them Relevant.

Last year, passive funds boomed in the U.S.: Nearly a trillion dollars flowed into passive management. Investment vehicles like exchange-traded funds exploded.

Ted Maloney, the CEO of the Boston-based firm MFS Investment Management, isn’t sweating it.

“We are all-in on active management,” he told Barron’s editor at large Andy Serwer in an interview for the At Barron’s video series. “We believe that there will be a meaningful place for active management over the long-term.”

Mutual funds have long been MFS’s bread and butter: The firm actually invented them 101 years ago. They now manage more than $600 billion in assets.

He acknowledged that a mutual fund isn’t the most tax-efficient investment vehicle. “It has its imperfections,” Maloney said. “But we think it served the investment community extraordinarily.”

MFS is largely sticking to its traditional management approach, but it is starting to expand its offerings—and even launched an ETF last year. Maloney envisions a future where “people of all generations” own both mutual funds and ETFs, and buy in to both active and passive funds.

Maloney, who joined the firm as a stockpicker 20 years ago, was promoted to chief executive in January. With Serwer, he discussed MFS’s long view on investing, how their clients are responding to changes in Washington, and his thoughts on the industry trend toward private investments.

Below are highlights from their conversation, which have been edited and condensed for clarity.

Barron’s: You were on the research and the stock-picking side. How does that inform your thinking now as CEO?

Ted Maloney: We get trained as long-term investors to understand that if the whole market is moving in one direction, then maybe the thing to think about is to move in the opposite direction. That is really hard to do. But being trained as an investor gives me a slightly better chance of leading the team in that direction.

What does it mean to play the long game in terms of investing?

It means to think multiple years into the future in terms of what is best for our clients, which also means what’s going to happen in markets and securities over the long-term. Markets have become extremely short-term focused—more and more so everyday. That actually increases the value of thinking long-term, but it also makes it much harder.

MFS’s legacy is in active management. But now there are ETFs and other new products out there. How are you addressing that?

There have been tremendous trends toward passive management. The past years have really supercharged that. As the equity indexes get more and more concentrated, and the fewer and fewer stocks in the stock market indexes are driving all of the performance, that creates the perfect environment for passive to outperform active.

We don’t believe that is sustainable. We think that the level of concentration that the markets are at today is beyond anything that we’ve seen in history. And as the market inevitably becomes less concentrated—we don’t know when, and we don’t even really know exactly how or why, but we know that it will—the ability to add value as an active manager will really come to the fore.

What issues are you looking at in Washington and how are they affecting the mutual fund business? What is on your wish list when it comes to Washington?

We have a team of 300-plus investment professionals that are working all day in their areas of expertise to understand how even the slightest change on the margin of policies—both in the U.S. and around the world—can affect the long-term cash flow generation of the companies whose stocks and bonds we invest in.

As we think about our industry, the tax treatment of mutual funds is something that could be fixed at the congressional level. There isn’t a lot of appetite for that at the moment. But we think it would be a really great service to the end investor if mutual funds could be taxed on par with other strategies.

Are there forces that may be looking to prevent that?

Sure. In the early stages, it would be revenue negative for the federal government. So in an environment where the only revenue negative people are looking for are headline tax cuts, to have sort of this subtle tax cut that people don’t see the direct benefit of on the day that it happens, it isn’t a good headline.

How are your clients feeling about the markets? Optimistic? Pessimistic?

The average end investor is sitting on a tremendous amount of cash, which you can understand when times are uncertain. You can understand folks wanting to sit on the sidelines. We also think over the long term that isn’t in their best interest. So we’re working with our advisor partners to try to help the investing public understand that actually when times are the most scary, that is when you want to make sure that you are invested in risk markets—especially if you have a very long-term time horizon.

This reserve cash is high versus historical levels?

Yes.

What do you consider your competitive set to be?

It has evolved a lot, because the world of investment management has consolidated. There has been a decent amount of mergers and acquisitions in the industry over time, as well as competitors that used to be purely in the private and alternative space coming more into our space. So really anyone who manages money on behalf of a client is a competitor for us.

But we have this much harder competitor, which is called the market. If we can deliver results for our clients against that competitor, we are very confident that we’ll get more than our fair share of the marketplace.

What do you think about this notion of private investment, private market, private equity, private credit being sold to or being bought by retail investors?

It is the dominant trend in our industry, and one that we aren’t participating in.

But we also never say never. Never is dangerous. So I don’t know if it’s never. But at this point, we pretty much stand alone in being a large asset manager who isn’t leaning into the private space. Not because we have major problems with the private space, but because we have so many great opportunities in what we do, so much confidence in what we do for our clients and a real humbleness that that is hard work. We are going to need to marshal all of our efforts to continue to be excellent for our clients.

It seems like you guys don’t like to be on the bleeding edge of things.

Well, we are willing to be if we think there is a real client need.

We have been happy to focus on what is cores to us and be able to sit back and watch how markets are evolving, what client needs are evolving, and make sure that before we go deliver something to a client, we are extremely confident we can deliver them something excellent.

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